tv Best Of Bloomberg Markets Middle East Bloomberg January 5, 2018 8:00pm-9:00pm EST
♪ >> welcome to the best of bloomberg markets, middle east. i'm tracy alloway. across the we come antigovernment protests sweep across iran. inviting threats of sanctions from the u.s.. oil prices surged to three-year highs on fears of supply disruption as u.s. stockpiles fall. as the u.s. convex a turkish banker of helping evaders iran sanctions. relations between the two bank countries hit a new low. story.to the weeks top
we spoke to our reporter intel ran about the wave of protests and how the government is dealing with them. why thenk the reason head of the irgc regard cannot yesterday and made that statement saying, declaring yesterday that the protests of come to an end is because they were actually dwindling down. by tuesday, if you people are in the streets. by what we can see on social media, and there were no reporters -- reported deaths. maybe there was one other death that had added to the tall, bringing it up to 21 people. what theight now, government is doing and what the authorities are doing, they are consolidating, they are seeing what this will mean politically both for the state, and for the president's administration.
i think there will also be a sense that from now on, authorities playing down the protests. i don't think the protests were -- as deep or as dramatic as maybe being suggested in some media. acrossve been scattered several cities, which is unusual. they appear to be spontaneous after one organized protest kick started everything. by all accounts, there was no more than 20,000 people involved altogether. as the unrest begins to wind down, do we have and the of which side is coming out of it in a worse position? is it rouhani or they conservative hardliners? -- or is that they conservative hardliners? a good question. it is complicated and tricky to answer. i think it will be hugely
challenging for rouhani because the very beginning of the protests were about his opponent coming out and protesting against him. gave the government the perception that they were doing that the liberally to destabilize and delegitimize rouhani. when the protests started to catch on, a younger demographic, they were getting involved possibly because of their disgruntle. catch on to some kind of different fever, different kind of waves that was the entirey aimed at system, which encompasses those hardliners. the would argue, more than rouhani administration. they are both being challenged by this. they will both try to protect their legacies going forward. dr. trader joins us from
washington. let's start out with a general overview. what do you think the significant -- significance of these protests are? biggest are the protests that have occurred since 2009. an uprising when the population went out in full force in objecting to the election basket -- back then. these are much smaller protests compared to 2009. it is also a different segment of society that is out there protesting. i've spoken with organizers of the movement, they are largely --the sidelines, but also to keeping a distance from what is happening right now. the larger significance of this a i do not think it will need revolutionary situation. it does not seem to have the organization and leadership to existential threat to the regime. to theforce change conversation and shake up the
political landscape and force the government to pay attention to these segments that have been neglected. people aret of drawing parallels with the 2009 korean movement. one of the differences they are highlighting is that during that movement, you had some sort of clear identified demand from the protesters. those are not necessarily present in the current waves of unrest. what is it exactly that the protesters are asking for? dr. parsi: it is quite unclear. in the beginning, it was a very much focused on the very dire economic situation, a lot of frustration that the economy has not moved in the right direction. thatyou also have seen there is a stronger political town that has been taken in the last couple of days in which there are stronger slogans targeting the regime calling for a revolution in the country. not at all as clear as it
was in 2009. there were clear objectives and a man's. again, a clear organization and clear leadership. a lot of the iron of the recent protests does seem to be directed at the president. i am wondering, how does this fit into the current relationship with the conservatives or the hardliners? do they become emboldened by this wave of discontent, or do they become frightened by it? they are also under scrutiny here as well. first ones were organized by hardliners. they were trying to embarrass the rouhani government. they quickly lost control over it. what you ended up seeing was a lot of people started drawing -- joining the protests who were not part of the conservatives and started to not only push for these economic changes, but started targeting the regime as a whole, including the hardliners. you can see some hardliners and express some
disappointment and regret over what they initiated. at this stage, if the rouhani government manages to condoleezza to, particularly if they managed to do so without calling out the security forces, i think rouhani may be able to use it as a leverage against the hardliners and say, there is a need for much deeper and profound reform than what he has thus far.to pursue because of resistance from the hardliners. tracy: really fascinating dynamics at play. before i let you go, one more question. i have to ask you, the response from donald trump. what does this mean for u.s.-iranian relations? in particular, the nuclear deal going forward? notparsi: donald trump is someone anyone and iran listens to. i don't think the protesters are taking any cues from him. it is not a plus to have him on your side right now. i think his impact on the ground is minimal.
he has once again clearly expressed his desire for some form of a confrontation with the iranian government. this probably will give him an added excuse to get rid of the nuclear deal, which he is scheduled to renew the waivers four on january 12, or 13th. it does increase the likelihood that he will not renew the waivers. if he doesn't, that means the sanctions come back into place. and the deal will most likely to -- likely collapse. we are standing at a point which the likelihood of the deal collapsing is probably higher than it has been. tracy: oils on the boil. prices surging to a three-year high. is opec's scandal finally paying off? more on that. this is bloomberg. ♪
the new yearinto with unprecedented vigor. analysts say the credit goes to opec. our middle is energy market reporter, anthony dipaola. >> this story has always been a supply story. the supply was too high and that is what pushed the price down. opec cut back on that supply to bring the price back up. what we will see this year is that supply story continuing. it will depend on whether shale producers in the u.s. take it manage of that optimism, lock in hedge camelot and pump up the drilling. to analysts we have spoken -- analyst we have spoken to has shown cheating by opec or non-opec members as they see the price coming up, an incentive to produce more becomes even greater. into the oil leak market and will that compliance levels suffer a little bit. it is going to be a supply story going forward. >> on the sharepoint, if you are
trying to watch the market and gauge whether or not shale is wrapping up its production, what indicators are you looking at? i know we have stockpile data that is coming out later today. a lot of people have been pointing for instance to the wti discount. it is a big factor that will show what producers are doing on bringing oil back on. there is a lot of wells that have been discovered, prepared for drilling, but not yet drilled. those will be faster to bring to markets. that brings -- that gives shale and advantage. we did see some signs from those companies that are active in the shale prod -- in the shale focusing on generating cash, rather than getting barrels through the door. we will have to see this the academy between those wells that might be faster to bring on, and this intention to degenerate -- to generate cash. we will have to watch that on the show patch. fromite a cultural change
investing their money into further exploration and production, versus returning money to shareholders. you mentioned opec compliance. is there a risk that complacency creeps back into opec as oil continues to rally? is there a heightened prospect of cheating? anthony: i think there is a question mark looming over the market because there was this prospect that if the price comes back, those u.s. stockpiles he mentioned, that opec could exit that agreement early. midyear in june, they might look at it at their meeting and say, let's scale this back. or let's announced the exit strategy. over is that issue looming the cuts. are they going to last the whole 2018? will opec have to be clamping down on compliance if producers -- we might look at people like iraq, like libya, nigeria,
trying to raise production. >> what about russia? there was a question mark of russia going into that opec meeting. anthony: russia has been a key member of this cut. russians do want to increase production. we have seen high production numbers from them last year. they do want to bring production back. this is when we will have to watch closely. they could be a risk to the levels of compliance. anthony dipaola bringing us all the latest on the fresh optimism in the oil market. thank you so much. what's get more perspective on exactly that when it comes to the middle east region. still with us is the director of economic research at the gulf research center foundation. theere just talking about risk of noncompliance from opec members. i'm wondering, is there a risk take theirountries
foot off the pedal when it comes to economic reforms as some of the pressure eases, thanks to those higher oil prices? i believe not. i don't think, especially saudi arabia, is going to slow down its reforms. i think there should be an additional effort to accelerate some of them. i think they should not. definitely, oil will be trading to $65.0 -- $60 right now, we are exuberant on the spot price. i think some of the curves are predicting that oil should correct. i think the issue here is not so much compliance, but if they thate to increase output, is, opec, you still have 1.8 million barrels out there that need to be reduced. how they reduce it and the pace million,ng, that's 1.8
is an issue. that is the key to maintaining the oil price at 60. you indicated, the challenges, how do they maintain the oil prices high enough to entice investors for the saudi aramco in 2018. tracy: my comes to the higher oil price, some people are talking about the return of the long missing geopolitical risk premium, thanks to the drama we have seen in iran, which is the third biggest opec producer. let's take a listen to what he and bremmer, the founder of the eurasia group had to say over iran yesterday. >> it is very clear that trump his anti-iran.h he has don that with a stronger relationship with the saudi's. he has done it by going after the iranians, going after what they have done with support for hezbollah.
most recently, given the demonstration in iran, coming out and saying, we oppose the oppression. john, i'm curious if you see any potential that that heightened political unrest in iran and heightened political tension across the middle east will begin seeding into the oil price? i think that in many ways, this has been priced in over the last few days. we should see today and tomorrow how oil trades. i do not see any significant upside. the rest of the opec member countries can easily cover, if there is an iranian it shortage, due to the geopolitical uncertainty. maybe a little bit of an upside. nothing substantial. word according to the fed. the latest minutes on the continuation of gradual tightening.
♪ tracy: welcome to the "best of bloomberg markets: middle east." a hawkishd to digest tilt to the december fed minutes which showed most members rateng continued gradual increases, despite concerns about low inflation. our chief asia economic correspondent explains. >> it is quite remarkable. on the one hand, the fed signals they will continue raise interest rates. i think we knew that. there is still no unified narrative on the pace in which they will raise those interest rates. it seems they are divided among themselves as to whether they should accelerate, or keep on the data watching process. when you consider the backdrop of what is happening in the u.s. economy, manufacturing data this week showing gangbusters, we
know the labor market is doing well, some tentative signs that wages are picking up. now in the middle of that, we have this tax reform coming down the pipe. you thought the fed might be moving a more hawkish way. maybe it reflects the transition between the chairman right now. i think it is what these minutes tell us. something else coming down the pipeline. a new chair for the fed. jerome powell going to take the homes in february. did the minutes from yesterday tell us anything about that transition period and what he might be like as head of the fed? a i think it is going to be fascinating time. on the one hand, the minutes did not tell us much news. that would put a lot of focus and emphasis on watching mr. powell's remarks over coming weeks and months as he digests the impact of what the tax
policy means for the u.s. economy in the world economy. thehigh -- and what dollar's doing. in one respect, we are in a transition phase. from here, the narrative will be reset. it is not that mr. powell is expected to be different to miss given the backdrop of what is happening on tax policies and the economy, it will be interesting to see if he turns out to be more hawkish than anticipated. theyll get indications are coming weeks as he starts speaking more publicly. so much for you joining us. let's bring in ray ferriss, head of asia-pacific fixed income research and economics. he joins us from singapore. good morning to you. i'm curious, maybe to begin, the federal take on reserve, the fomc minutes from yesterday, a couple of your competitors interpreting those
minutes as more of a hawkish tilt for u.s. monetary policy. think they are more of the same. there was not really a lot of tremendously new information. as was mentioned, it is very clear the majority think that at least three hikes for next year. the fed seems to be on autopilot. they are hiking -- significantly. they are hiking closer to the dots than not. markets are better priced for that than they were the beginning of last year, what which is part of the reason why the markets did not really react to the minutes. we think the fed will continue grinding rates higher through the course of 2018. press you on to that market pricing. we have seen a bit of a take up in u.s.-- tick up rates. if you take a look at the chart,
that shows some breakeven rates across a couple -- a couple of 10 years. the firstove 2% for time since march. we have seen some economic data from around the world showing a little bit of an uptick in inflation or we had some of the pmi's coming up this week's adjusting maybe pricing increases will be gaining over the next year or so. what is your take on the markets positioning for inflation? is that the wildcard for 2018? ray: certainly any really big upward surprise in inflation would be a shock to markets. i do not think the rise we have seen so far in breakevens is because of that. it makes sense with the growth of data, the new tax plan in the imaginel of that to that the continuing strength -- strengthening of the u.s. economy would add inflationary pressure. we forecasted to rise from now
until the end of the year. other factor is oil prices have gone up a lot. does breakevens are about headline cpi, not core c.p.a.. they have to incorporate some degree of the fact that oil, as a shock to the system, has gone up and does not have any signs of coming down anytime soon. with your fixed income hat on, walk us through the action we saw in the bond market yesterday. kind of muted, i thought. i do not think the fed really gave us anything that was particularly surprising. they are grinding their way toward what is now pretty well priced in the markets. there was not a whole lot for markets to react to. tracy: coming up on the best of bloomberg markets, middle east, the feds tightening dance could take the shine off gold. our next guest remains bullish.
anchor: welcome back to "the best of bloomberg markets, middle east." we started the year on a high, but the latest fed minutes have taken the shine of gold. metalsprecious consultancy founder tells us he's remaining bullish. >> it is overdone. certainly a 7% rally straight line over the last month is a bit much, but the key thing is it was in december. in december, a lot of people had stepped away from the trading floor. anchor: walk me through the rally in gold we saw in 2017. i have to confess, i don't get it.
of riskt have a lot that materialized, volatility was really low, the federal reserve was hiking rates. explain to me what was going on with gold. >> it was a very solid year. as you get equity markets posting record after record, you are creating more money, and that has to go somewhere. when you've got equity markets record after record as you get money in your pocket, you are saying what to go wrong? i think that really was it. the flows of money into gold really was from equity markets. tracy: the other big winner last year in the equities, industrial metals, including palladium, which we have been bullish on for over a year. what accounts for that rise, and how much further can it go now? guest: it is demanded supply. simply put, more palladium is consumed every year then is
produced. that is a chronic problem we've had for about 10 years. deficit hasof that really come from russia, but of course russia has its own problems. therefore the flows of palladium from russia and the west is a bit of an issue. for thee the lifeline shorts, palladium coming from those russian stockpiles, doesn't happen anymore. that really is the driver. if you short palladium it is perg to cost you 5% to 7% annum interest. tracy: what is the readthrough on the global economy? if i look at the rally we have seen, it is really positive, but if i contrast that with the yield curve, it is saying something else friend on market -- else from a bond market perspective. guest: everyone is talking about
gross in 2018 -- about growth in 2018. that must be good for demand, and that must therefore be good for palladium. it certainly had an all-time high. it is a bit steep. if you look at the last 12 months, it looks like -- i would be a bit careful. i see a pullback. tracy: coming up on "the best of bloomberg markets middle east," gold issuers are now more reliant on the bond market issue cash. more just ahead. this is bloomberg. ♪
about why 2018 looks so promising for corporate bond sales in the gcc. when it wasck happening in 2016 and 2017, there was that expectation. people were hoping the big family businesses were going to come back to the market and sell. but what actually happened was that growth slowed and projects were canceled. the need for funding actually fell. people were worried about banking liquidity. people held off on funding and were waiting for a better time. people think that that time is 2018 mostly because of these expansionary budgets we have seen in saudi arabia and qatar. tracy: speaking of expansionary budgets, what does that mean for sovereign bond issuance? 2017 is going to be a hardier to beat. reporter: absolutely. that is something we will be looking out for as well. people still see that sovereigns will be selling, but not as much because all prices have risen.
they are anymore comfortable place than they were two years ago, and people are more confident that the government's have more cash in order to deal with the budget gaps they were trying to fund with these bond sales. tracy: i'm looking at a table bonds andfor gcc issuance for 2017. i see 85 billion issued last year across corporate's and sovereigns. what is the total -- what does the total issuance outlook look like for 2018? reporter: most of the analysts we spoken to say that it will at least match that number. people are quite optimistic that it will be about 80 to 90 billion this year. this all depends on whether or not the sovereigns come in because they really are the massive issuers here. becky so much for joining us today -- thank you so much for joining us today. let's bring in the director of fconomic research at gul
research center foundation. are sovereigns-- in the gulf region going to have to plug budget deficits again they havingr are that rally in the oil price? guest: definitely because of the oil price, where it will be between $60 and $65, they will not be forced or compelled to go out and issue as much as they did in 2017. i think that it leaves a lot of room for the corporates to come in an issue more debt. given that expansionary side of the budget in the region, it will be there to support that. corporates will be more willing to issue debt, and that is a building story for 2018. tracy: from an economic
perspective, doesn't matter how corporates for securing their financing? is there a difference between going a bank and getting a loan or going to the public market and issuing debt? guest: i think there is a huge difference. if you go to the public market givese your debt, that you a lot of security and support. it basically recognizes the global presence of these corporates. if you go to your regional local bank, it is fine, but it is not the same. client-lenderew relationship, and that is very important because you want to create a proper debt capital market where corporates are rated and viewed globally by different players, not just by the region or local banks. tracy: doesn't help the region when it comes to tapping foreign investors as well?
of course, this is something they continuously say they want and we are still rating for the saudi aramco ipo, for instance, this big moment for gulf markets and companies, potentially. definitely because this is part of the program. even if you look at saudi arabia, you would see that the fdi, it ison for upwards of $3 billion by 2030 in ofeconomy in today's terms $700 billion. there's a lot of opportunity for foreign money to come into the region because you only have two sources of investments, private and government. when it comes to private, it really comes from the foreign and the local. if the foreign doesn't match, it has to be recouped by the local.
tracy: the lira took a hit this week as a turkish banker was convicted in new york of helping iran is aid u.s. sanctions. it is likely to further strain relations between and kara and washington -- between ankara and washington. ever since this case came into focus, there's been the image processed -- there's
,een protests in turkey accusing the u.s. of trying to interestsy's economic , labeling it a coup attempt. we have turkey upset with the its support for kurdish rebels fighting the islamic state in syria. washington is concerned about turkey's growing closeness to russia and iran. the three nations are working closely together, trying to solve the situation in syria. extradition -- wants of -- and just a few months ago we had the diplomatic crisis over the visas, both
countries canceling visas for each other. this latest verdict could harm relations even further. we do see theow turkish lira weakening a bit on this news. what more can we expect in terms of the market reaction following this ruling? reporter: ever since the ruling we have seen turkish financial markets, the lira, and bank shares react to development in the case. the lira fell .5% against the dollar after the verdict, but what we really need to watch his bank shares as they open a few hours. turkish banks could react. going forward, we need to see if there is a u.s. probe into other turkish banks for allegedly helping iran is a u.s. sanctions , and fines could follow. what could also move the market is reaction from the turkish
government and what president erdogan has to say regarding the latest verdict. tracy: all right, thank you so much. we have been discussing the release of those fomc minutes all throughout the show. of course they are of vital importance for the rest of the world with its many pegged currencies. joining us to discuss it is the chief economist at oman investment fund. i want to start up with a chart which really shows the action we have seen in emerging markets over the past year. it shows the em rally across equities, currencies, and finally bonds. how long is this going to continue with the fed hiking rate? guest: there are a few forces here. clearly one is the interest rate set by the fed, but on the other side you have a very strong global economy.
for most of these emerging markets, brazil, south africa, commodity prices are key to their growth. with the global economy gaining momentum, this effect will prevail on the gradual increase in interest rates by the fed. tracy: oman, europe employer, announced its 2018 budget this week. they are expecting -- your employer, announced its 2018 budget this week. a big chunk will be financed through external bonds. it looks like the oman will be the first em sovereign issuer of the year. is now the right time to issue given that we have seen a flood of supply over the past year? guest: there is never a right time. you have to have a program of issuance, and actually as you become quite important element in the emerging market bonds coming you have to stabilize your program -- bonds, you have to stabilize year program of
bond issuance. the 3 million omani riyal deficit is all due to capital expenditures. in other words, the omani government is trying to borrow to finance infrastructure. that is a project with a net positive return, and therefore that is how it will build room for maneuver to repay andriy service its debt. tracy: oman i believe did say this was a budget with an emphasis on diversifying the economy. how important is that for oman in particular and the rest of the wider gulf region? guest: diversification has been the overriding objective of economics for a long time in the gcc. so far the success has been mixed.
in general, as the population grows, the chunk of non-oil private sector needs to rise. in order to do that, you need to build infrastructure. you need to provide skills for the workforce. you need to increase the level of education. you need to invest in research, and so on and so forth. that is what this budget essentially does, even in other countries from saudi arabia to , the emphasis on human capital and infrastructure is increasing. we will see this over the next five to 10 years. it is not a short-term objective. tracy: right. just going back to the bond issuance we were discussing, i am a bit of a benchmark index geek. you were pointing out that omani debt is actually an increasing proportion of the gm debt benchmark. what does that mean for investors? guest: it means they have to pay
a lot of attention to oman. i have received dozens of fund managers, and they want to know how the omani economy works. the want to know what is long-term stance of fiscal policy. obviously these require more of the omaniysis economy, which is a little bit different from a well diversified a small economy in, say, europe. the fact it is heavily reliant on oil implies that the escalation in the nominal gdp are quite substantial, so one has to see through this in order to make the right choice when investing in omani bonds. tracy: that is it for this "best of bloomberg markets, middle east." we will be right here for the start of the trading week in the gulf sunday morning at 8:00 a.m. in the uae.
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